Nonstatutory (or Nonqualified) Stock Option

A type of employee stock option where ordinary income tax is paid on the difference between the grant price and the strike price, rather than capital gains. This kind of stock option stands in contrast to an incentive stock option (ISO) in which capital gains taxation rates apply.

When a corporation wants to reward its employees without bearing the burden of additional expenses, it may wish to consider offering a non-statutory stock option (NSO). Unlike ISOs, NSOs are not bound by timing restrictions. ISOs are generally offered as a reward for remaining with a company for a period of time, as they may not be purchased at the strike price until a significant amount of time has passed. As a reward for “being so patient and such a good boy while you have been waiting” ISOs that meet these timing requirements are taxed at a favorable capital gains rate. By contrast, NSOs are not subject to such waiting periods and do not benefit from capital gains taxation rates.

These stock benefits are some of the most common securities packages offered as benefits to employees generally. They are easy to issue and provide instant gratification for employees interested in selling right away. They may also be held onto in the hopes that the value of the stock will rise over time.

EXAMPLE:

Little Boy: “Mama, mama! There is a new bike in the garage with a big bow on it and the bike is MY SIZE!”

Mom: “Yep. That’s for you. I sold some non-statutory stock my bosses offered me last month and I thought each of us deserved a treat.”

Little Boy: “Oh, thankyouthankyouthankyou. What is your treat?”

Mom: “I am going to have Aunt Jane hang out with you next weekend so I can watch Netflix for three days straight while ordering food delivery.”